Arun Kundnani's book, vastly more intelligent than the usual "war on terror" verbiage, focuses on the war's domestic edge in Britain and America. His starting point is this: "Terrorism is not the product of radical politics but a symptom of political impotence." The antidote therefore seems self-evident: "A strong, active and confident Muslim community enjoying its civic rights to the full." Yet policy on both sides of the Atlantic has ended by criminalising Muslim opinion, silencing speech and increasing social division. These results may make political violence more, not less, likely.

The assumptions and silences of the counter-radicalisation industry end up telling us far more about particular ideological subsections of Anglo-American culture than they do about the Muslims targeted. The two dominant security approaches to Muslim citizens described by Kundnani – "culturalist" and "reformist" – highlight ideology rather than sociopolitical grievances.

Culturalism's best-known proponent is Bernard Lewis, Dick Cheney's favourite historian, who locates the problem as Islam itself, a totalitarian ideology-culture incompatible with democratic modernity. So Mitt Romney explains the vast divergence between Israeli and Palestinian economies thus: "Culture makes all the difference" – and decades of occupation, ethnic cleansing and war make no difference at all. Writer Christopher Caldwell believes residents of the Paris banlieue rioted in 2005 because they were Muslims (although many weren't), and not because of unemployment, poor housing and police violence. Perhaps the silliest culturalist intervention was Martin Amis's essay "The Second Plane", where Amis breezily admitted he knew nothing of geopolitics but claimed authority nevertheless from his expertise in "masculinity" – 9/11 was explained by Muslim sexual frustration. Such discourses are part of an influential tradition. In 1950s colonial Kenya, psychiatrist JC Carothers understood the Mau Mau uprising as "not political but psycho‑pathological".

More charitable than culturalism, reformism identifies the problem as a perversion of Islamic doctrine. With General Petraeus's Iraqi "hearts and minds" campaign, reformism came to dominate the post-Rumsfeld Pentagon; what started in counter-insurgency was soon considered as relevant to Bradford as Basra. It involved an accumulation of anthropological "knowledge" through surveillance (David J Kilcullen describes counter-insurgency as "armed social science"), and it underlay the assumption of Obama's 2009 Cairo speech that positive recognition of moderate Muslim culture could solve political conflict. Qur'an-reading Tony Blair shared the notion that terrorism's "root cause" was "a doctrine of fanaticism".

This focus on doctrine meant the state intervened to promote correct belief. Muslims were categorised as "extremists" or "moderates", although no link has been proved between extremist ideas and terrorist violence. The clumsy binarism sometimes went further – Salafis were extremist, Sufis were moderate – although most Salafis are quietists and some Sufis fight jihad against America. Those labelled moderate were quickly reclassified if they spoke out on foreign policy.

The emphasis on ideology led to the criminalisation of certain ideologies, and to the new crime of "glorifying terrorism" (as opposed to inciting violence). Increasingly, young Muslims were imprisoned for their reading matter. Thus the more liberal approach ended by assaulting liberal freedoms, and culture was transformed into a battlefield. By turning comparatively new (and by no means universal) values such as gender and sexual equality into icons of superior westernism, "liberalism became a form of identity politics". (Reformism is heavy with bleakly absurd contradiction. For the sake of cultural sensitivity in Ramadan, hunger-striking Guantánamo prisoners are force-fed only at night.)

In one of several illuminating character sketches, Kundnani shows that the radicalisation of Yemeni-American Anwar al-Awlaki, killed by a US drone in 2011, involved no psychological crisis or theological shift (as the reformist literature would have it), but only experience of the war on terror, domestic and external, including his American-inspired arrest and abuse by Yemeni police. The preacher's newly violent language mirrored not the Qur'an so much as war on terror discourse itself.

This failure to engage with the real roots of violent alienation has ramifications going far beyond security. Both culturalism and reformism neglect what Kundnani calls "the basic political question thrown up by multiculturalism: how can a common way of life, together with full participation from all parts of society, be created?" Those British Muslims who "ghettoised" didn't do so by choice but as a result of industrial collapse, discriminatory housing policies and the fear of racist violence. Identity politics was promoted and funded by local government in response to a 1970s radicalism (for instance the Asian Youth Movements, modelled on the Black Panthers), which linked anti-racism to anti-capitalism. Home secretary Willie Whitelaw supported "ethnic" TV programming on the grounds that "if they don't get some outlet for their activities you are going to run yourself into much more trouble". Multiculturalism, then, was not a leftist plot but a conservative move bringing together the state and community "uncles" against a much more subversive alternative. And in the last decade, while "anti-terror" resources have flowed into Muslim communities, benefiting the usual gatekeepers and provoking the envy of equally deprived non-Muslim communities, young, alienated Muslims, as likely obsessed by the Illuminati as the caliphate, are deterred from speaking – and being challenged – in public.

Kundnani provides detailed, well‑contextualised accounts of the entrapment of vulnerable African-American Muslims as well as the criminalisation of the (already traumatised) Minnesota Somali community (for its opposition to the US-backed Ethiopian invasion of Somalia). Arab-Americans, who had either identified as white or as a "model minority" (patriotic, bourgeois, less troublesome than black people or Latinos), suddenly found those options closing. In comedian Dean Obeidallah's words, "I go to bed September 10th white, wake up September 11th, I am an Arab." Anti-Muslim hysteria was whipped up by the media, the entertainment industry, and a state vocabulary that considered pipe bombs "weapons of mass destruction" when used by Muslims. Anti-Muslim violence in America increased by 50% in 2010.

The book closes with discussion of the new European far-right's embrace of Zionism – it is now Islamphobic rather than antisemitic. In "creeping-shari'a" scaremongering, the tropes of classical antisemitism are clear. Rightists "ascribe to Islam magical powers to secretly control western governments while at the same time [seeing it as] a backward seventh-century ideology whose followers constitute a dangerous underclass".

In Britain the English Defence League was born; in the US a media-based Islamophobic campaign fed existent conservative movements. Both peddle varieties of the "Eurabia" conspiracy theory, whereby a corrupt European political class has signed the continent over to Muslim domination through immigration, birth rates and multiculturalism. At one extreme, this brand of "anti-terror" politics soon arrives at its own, Anders Breivik-style terrorism.

Arun Kundnani is one of Britain's best political writers, neither hectoring nor drily academic but compelling and sharply intelligent. The Muslims Are Coming should be widely read, particularly by liberals who consider their own positions unassailable. "Neoconservatism invented the terror war," Kundnani writes, "but Obama liberalism normalised it, at which point, mainstream journalists stopped asking questions."